Beware of these three big dividend payers

Coca-Cola Amatil, IAG and Suncorp appear to be paying unsustainable dividends.

a woman

With the 2013 financial year reporting season coming to a close, now is a good time to look at the companies that might under- or overperform in the next 12 months.

Investors would have watched with pleasure (or envy) as reliable, income-generating stocks outperformed the ASX 200 index over the past 12 months. This was driven by record low interest rates pushing down the returns from term deposits and bonds. Companies with excess cash realised that performance of their share price could likely hinge on whether or not they returned that cash to shareholders. This is evidenced by the 10% increase in dividends announced this reporting period, while revenue and profit growth has been in low single digits.

The fact that earnings and profit have not increased meaningfully, while dividends have increase by 10%, indicates that there must be a number of companies that have declared unsustainable payouts. Of these, three ASX 200 stocks stand out to me: Coca-Cola Amatil (ASX: CCL), Insurance Australia Group (ASX: IAG), and Suncorp (ASX: SUN).

Coca-Cola Amatil announced a drop in revenue and profits for the first half of 2013 and downgraded earnings to between flat and a decline of 4% for the 2013 calendar year. The company has good cash flow and is seeing an improvement in its Asian markets, but weakness in Australia is inhibiting the company’s ability to grow earnings.

Coca-Cola announced an interim dividend of 24 cents per share, plus a special dividend of 2.5 cents per share. This has increased the payout ratio from the mid-70% of profit to around 82%. If last year’s payout is maintained, the ratio will increase towards 90% by the end of the year, generally an unsustainable level for a company which aims to grow into developing markets.

IAG announced a huge profit rise of 275% on the back of low claim numbers and a rise in insurance margin to 17.2%. This allowed the company to declare a full year dividend of 36 cents, more than double last year’s 17 cents. IAG has forecast a much lower margin of 12-14% for the next financial year, and investors should not expect that the high payout ratio of 64% will be maintained in coming years.

Finally, Suncorp reported a 32% drop in profit, but surprised with a 50% rise in dividend to 30 cents per share, and a special dividend of 20 cents. This is expected to raise its payout ratio above 80%, which is considered unsustainable in the banking sector.

Foolish takeaway

Investors should be cautious when investing in stocks purely for an income stream. If the company does not have the ability to maintain and grow dividends over the long term, then substantial losses of capital may occur when it disappoints the market. QBE Insurance (ASX: QBE) is a recent example of this, and risk-averse, income-seeking investors may be better off purchasing the banks or real estate investment trusts.

Here’s a strong, sustainable dividend for you. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Andrew Mudie owns shares in Coca-Cola Amatil.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »